U.S. Recovery: ‘Housing’ or ‘Lending’ Illusion?

The Wall Street Journal in its editorial this week (The Housing Illusion, June 2, 2011) makes a sensible call for an economic recovery built on capital investment in plant and equipment so the United States can grow in a healthy way by creating jobs. But instead of taking the next step in its argument by asking why our businesses and financial institutions aren’t deploying their resources to that end, the Journal points its finger at the housing market and says our country’s historic support for home ownership is holding the recovery back.

It’s reasonable to wonder how home ownership gets connected to the investment decisions of businesses and to the lending decisions of financial services companies. The Journal does it by tracing the connection back to the Federal Reserve’s accommodative interest rate policy in 2001, in the wake of the bursting technology bubble and the Sept. 11 attacks. That easy-money policy, the Journal says, prevented the economy from collapsing after those destabilizing events, but it did it by inflating another asset bubble, this one for housing. “Fueled by subsidies and easy credit, with mortgages guaranteed by taxpayers, we built McMansions and vacation condos,” the Journal says.

Hence, the housing boom. Then, after the boom went bust, the government tried to re-inflate housing prices by encouraging banks to modify bad loans, raising FHA and the conventional secondary mortgage market loan limits, and funding a temporary home buyer tax credit, among other things.

This argument has become such a common refrain among critics of federal housing policy that we often hear it without thinking about whether it’s correct or not. The only “subsidies” home owners received at the time of the boom were the mortgage interest deduction, which has been in the IRS Code through some 17 presidencies and has served the country quite well during that time, and the federal backing of the secondary mortgage market companies Fannie Mae and Freddie Mac (implicit then, explicit now). There was also the historic federal role, through FHA, VA, and the Rural Housing Service, for households who have trouble getting on that first rung of home ownership.

All that’s true enough, but throughout the decades that those subsidies have been in place, they’ve never crowded out business investment in new plant and equipment or caused a housing bubble. Indeed, in 2001, the high-cost loan limit for Fannie Mae and Freddie Mac was $412,500. That’s hardly enough to fund the explosion in McMansions the Journal refers to.

So, what was new back in the early 2000s that fueled the rise of the McMansions? It was the innovation in the purely private market in which lenders, using jumbo and subprime loans, collateralized private-label securities for sale to investors in global capital markets.

To be sure, Fannie and Freddie did enter the Alt-A and subprime markets at the tail end of the boom, resulting in a taxpayer-funded bailout. But the U.S. Treasury in its white paper on the causes of the financial crisis made clear that the crisis was driven by the private-label securities market, not Fannie and Freddie, and in any case, much of the infusion of public capital to those two companies since they were placed in conservatorship is quickly returning to the Treasury and the final bill is expected to be in the tens of billions, not the hundreds of billions, of dollars.

The Journal is absolutely correct when it cites “easy credit” as the cause of housing mania in the early 2000s. The Federal Reserve’s accommodative monetary policy no doubt made that possible, but the Journal is making an argument that cuts both ways: there was nothing stopping businesses from tapping those low rates to invest in new plant and equipment, and indeed many businesses did just that.

Today, interest rates remain low and both businesses and financial services companies are sitting on capital, fueled in some cases by record profits. So it’s reasonable to ask: where is today’s business investment in new plant and equipment? After all, lenders have money, and the cost of that money is low. Where in this equation is home ownership? What subsidy or other federal policy is preventing businesses from tapping today’s historically low rates to build their capacity? What subsidy or federal policy is preventing lenders from lending?

The Journal would have us believe that our traditional support for home ownership — MID, the federal backing of Fannie, Freddie, and FHA — along with the newer subsidies like the bank loan modification effort, increased FHA and conventional loan limits, and the temporary home buyer tax credit (which lasted 18 months and ended a year ago) are somehow standing in the way of healthy economic growth.

That might be the Journal’s view, but it’s hard to imagine small business owners or even today’s home buyers taking that view. To the entrepreneur applying for financing or the household that’s trying to take advantage of today’s historically affordable home ownership opportunities, the only thing standing in the way of the recovery is lenders’ unwillingness to lend.

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Just one example,
Lets take the self employed borrowers. Normally their tax returns are very complicated. Underwriters are not willing to go the extra mile to figure thinks out. Its easier to decline the loan. This folks are coming in with 30, 40, 50% or more down payments /equity and still cant get a loan. A few local Banks start doing loans to this borrowers with common sense underwriting, till the Regulators shut the programs down, one by one.
Jacob Shayovitz,
Mortgage Banker

The article’s position regarding small businesses and entrepreneurs capitalizing on advantageous rates [if they are able to quality for a loan] is absolutely correct. Many of my clients seek SBA financing for their businesses – whether to transact a purchase, refinance, or acquire working capital for a new or existing business.

And to say that housing has never experienced a runaway boom cycle with unchecked financing – what about the early days of adjustable rate mortgages that were uncapped, or negative amortization loans?

Robert Freedman

Jacob, thanks for the example. Those are the kinds of stories we’re hearing about a lot. For agents and brokers it’s a major frustration, and for buyers and sellers it’s a major setback to their plans.

Anyone notice that the policies are exactly backwards? When the cycle neared it’s peak guidelines were loosened to extend -and worsen-the boom. Then as soon as the cow is out of the barn and down the road a piece they firmly and securely lock the barn door. They also look around to see what holes they can plug up and fencing they can build to make sure that come never does make it back home. Hence the HVCC, NMLS, the new GFE and TILA. The HVCC (Housing Valuation Code of Conduct for anyone living under a rock) is particularly distressing in that it’s particular aim is to prevent increases in housing prices and in fact is causing transactions to fail NOW even in a down market because the appraisals come in low. Yeah, that’s just what we need. Let’s suppress those nasty price increases that might prevent foreclosures and short sales…

It would be helpful to have “share” buttons on this blog for Twitter and fb, please!

Tim In Fla

100% agreed. Even though I am an appraiser, somehow I was able to remain independent through this mess and did not have to subject myself to the LSI’s, Landsafe’s, Streetlink’s, First American’s and the myriad number of other AMC’s that the big banks use to dicatate the Scope of Assignment and appraisal requirements which take most of these affiliated appraisers down the path of “appraising to the median”. Whatever the enagagement letter says (and the attachments, which sometimes include what the lender “believes” to be the value) is what you get back. After all, at $175 – $225 an assignment who wants to argue with your employer and spend precious extra time supporting your case. Especially if they require 48 – 72 hr turnaround times. Just give them what they want. The lender is happy as they just made $250 without lending a dime, plus application fee, flood certification, etc.

This is a terrible business model for the consumer and other industry professionals. I will continue to stay “unafilliated” as long as possible. But my question is this:

HOW DO WE GET THE WORD OUT TO THOSE WHO MAKE POLICY ?

This is a great piece. I plan to circulate it as much as I can. I suggest everyone do the same. Lets get back to a normal course of business. Without a housing recovery there will be no economic recovery.

While Housing certainly went thru a “bubble” ,from which we have not fully recovered. The “corrective” measures applied and passed by the Congress were aimed at making whole the Lenders that had engaged in policies that created the Bubble. By that I mean the unregulated CDO’s. After it was decided, to let Lehman Brothers fail, by Bush’s Secretary of the Treasury, a former CEO of rival Goldman -Sachs. Then the decision was made to “rescue” AIG. This company consisted of 4 divisions, only one of which under wrote the CDOs. Instead of separating that division and allowing it to fail. The TARP program rescued the Speculators. Only as an after thought was any attempt made to keep people in their homes. Now the whole concept of Fannie Mae and Freddie Mac is under attack.
Let’s remember that besides the 9/11 2001 attack, we were recovering from the “TECH BUBBLE”. Let’s keep in mind who the REAL BUBBLE MERCHANTS ARE. They go from one bubble to the next. Always creating, with subsidized funding, the next OVERSUPPLY. They get in, BUY and FLIP, leaving the small investors holding the bag. There next targets are either Clean Energy or Automated Factories. This time let’s NOT underwrite their risk with our tax money.

Jody

Lets not leave out an important fact in the story between the easy money and the housing bust because it didn’t happen without assistance from the fed. As they saw a need to actually start the ball rolling, they over did it by raising interest rates 17 times in a row, pushing the investors out of the game first, curtailing easy land loans which were abundant in places like Florida, and then leaving folks already invested with maturing short term loans no moves to make but walk away eventually from their investments. January’s
The balloon did indeed bust but the fed Pointed the needless early as the beginning of 2006

As stated above, it is the lenders that are primary culprits in the extended stay of this economic downturn. It is as if the mortgage lending segment of this economic catastrophe want to be exempt from loss from a situation that they played a major role in creating.

Home mortgage modifications should have been an integrated part of the bail out plan from it’s inception but inasmuch as it was not, the beneficiaries of the bail out should have line up and march in lock step, to the front of the line to assist the people that are responsible for them still existing.

What is so aggravating for me is that the “bubble” was created by duplicitous, premeditated, malicious and systematic financial/mortgage industry manipulations that not only worked on the lay level to pressure many appraisers into overvaluing residential properties from coast to coast, they created market instruments to bet against their practices working.

The worst of all of their reprehensible activities is that they have turned their backs on the folks struggling to hold on the overvalued homes of which they facilitated the purchase. The idea of this is simply further testament to the fact that there are no “AMERICAN” corporations…there is simply the profit motive.

MORTGAGE LENDERS, you will lose also!!! Accept this fact and do the right thing!! Help those homeowners that can save their homes do so by allowing mortgage modifications to values that reflect the true value of these homes and remove the barriers and red tape and facilitate “short sales” so that those Americans that can short sell their homes can get it done expeditiously.

Your investment in America’s success has to be more than just talk of patriotic support, it must manifest in actual deeds to help the citizens of your country mitigate the damage that you as professionals should feel more responsible for, than the average American citizen.

Though there is enough blame to go around, from Wall Street to the Appraisers that capitulated and brought in the values that were too high, to the real estate brokerages that said nothing as they watched these vial practices work, back to FREDDIE MAC & FANNIE MAE, the mortgage industry professionals are the folks that should be the primary leaders in the “MORTGAGE INDUSTRY” and they, in my opinion, should have felt the most responsible.

RH

Who are these economists? Are they in the same world I live in? Our unemployment will tell the story in the coming months as to how the housing market will rebound. It doesn’t matter what interest rates are, if you don’t have a job you can’t even pay the principle back. Economics 101, do not spend more than you take in. Maybe we need to put some 12th graders in Washington who understand this concept and start all over. It sure couldn’t be any worse. When are these so called economists going to figure this out both parties. They are nothing but a bunch of smooth talking thiefs. WAKE UP AMERICA or you can bury your head in the sand and think everything will work out. HA! HA!